Solar is getting cheaper, but how far can it go?

The usual take on solar power is that it’s a niche energy source, too pricey and erratic to meet more than a sliver of our electricity needs. Bill Gates has mocked solar as “cute.” But, as Paul Krugman reminds us today, that’s changing far more quickly than people realize. “In fact,” Krugman writes, “progress in solar panels has been so dramatic and sustained that, as a blog post at Scientific American put it, ‘there’s now frequent talk of a Moore’s law in solar energy,’ with prices adjusted for inflation falling around 7 percent a year.”

One big point to add to Krugman’s column is that solar is already being deployed on a large scale. Tom Dinwoodie, chief technical officer at SunPower, notes that the industry has been growing at a 65 percent annual rate in the past five years. In 2010, some 17 gigawatts of solar power were manufactured, shipped and installed — the equivalent of 17 large nuclear power plants. So just how far can solar go?

One key question is whether solar can reach “grid parity” — the point at which it can compete with fossil fuels without subsidies. As Shayle Kann explains at Greentech Media, this could happen in two ways. One, solar would become attractive to utilities even after accounting for the fact that the sun doesn’t always shine. At some point, for example, power companies may decide to rely on solar for hot, electricity-gobbling afternoons instead of relying on dirty natural-gas peaking plants. Alternatively, solar could reach the point at which huge numbers of retail consumers see big savings on their energy bills from installing rooftop solar.

It’s hard to know when, exactly, grid parity will arrive. Kees van der Leun, of the energy consulting firm Ecofys, predicts that solar could be competitive with fossil fuels by 2018 or so. On the other hand, as Tyler Cowen notes, energy markets don’t appear to be betting on this development. If it does happen at some point, though, a steep plunge in solar costs could be incredibly transformative. The International Energy Agency projects that solar could provide more than half of the world’s energy needs by 2060 if costs fell to $100 per megawatt hour — around 50 cents per watt installed. (At the moment, solar panels are gunning for the $1-per-watt threshold.)

A lot depends on government policy. The progress being made by the U.S. solar industry will likely slow at the end of this year if a federal grant program that makes a production tax credit more accessible is allowed to expire. A price on carbon would also make a big difference in giving solar a leg up against fossil fuels, which currently offload some of their total cost into the atmosphere. And the Energy Department is pushing research into energy storage and other technologies — check out the Optical Cavity Furnace — to bring prices down. So there are a lot of variables here. But at this point, it’s safe to say that solar has moved squarely out of “cute” territory.